The Fifth Circuit Court of Appeals recently clarified two questions that can arise when an individual files for bankruptcy and does not disclose a personal injury claim as an “asset.”
In Flugence v. Axis Surplus Insurance Co., appeal number 13-30073, the Fifth Circuit affirmed the bankruptcy court’s application of judicial estoppel against the debtor in bankruptcy. Cheryl Flugence filed for Chapter 13 (reorganization) bankruptcy protection. During her bankruptcy case, and after her initial reorganization plan was confirmed, she was injured in a car wreck and filed a lawsuit. Flugence never disclosed her personal injury suit to the bankruptcy court. When the personal injury defendants discovered this, they asked the bankruptcy court to judicially estop her from pursuing her claim against them, a claim she did not disclose as an “asset” in her bankruptcy. The bankruptcy court held that while Flugence was estopped to pursue the undisclosed personal injury claims, her bankruptcy trustee was not estopped and could pursue those claims on behalf of her creditors under Reed v. City of Arlington, 650 F.3d 571 (5th Cir. 2011) (en banc). On appeal, the district court held that judicial estoppel did not apply because Flugence did not have a duty to disclose a claim that accrued after she filed her initial petition. The Fifth Circuit affirmed the bankruptcy court’s decision and held that there is a continuing duty to disclose assets even after a reorganization plan is confirmed.
The first of two interesting points about Flugence is that the Fifth Circuit noted, but did not squarely decide, the question of whether an asset that the debtor obtains after the confirmation of a reorganization plan belongs to the bankruptcy estate. The court admitted that there is uncertainty about whether such an asset is “property of the estate” and discussed the two Bankruptcy Code provisions from which the confusion arises. One provision says that “property of the estate” includes all assets that the debtor acquires after commencement of the bankruptcy but before the case is closed. See 11 U.S.C. § 1306(a)(1). Another provision states that “Except as otherwise provided in the plan or the order confirming the plan, the confirmation of a plan vests all of the property of the estate in the debtor.” See 11 U.S.C. § 1327(b). The court did not decide the question because it was irrelevant in Flugence’s case: her plan specifically stated that the estate’s assets would not re-vest in Flugence until discharge.
The opinion could provide an opening in a case where the debtor’s plan or plan confirmation order does not specifically state that confirmation does not vest all property of the estate in the debtor. In such a case, § 1327(b) should operate to exclude any asset obtained post-confirmation from the bankruptcy estate. What Flugence does say, though, is that the debtor still has a duty to disclose that asset. The court’s logic is sound: if there’s a question about whether a particular asset is property of the estate, a question caused by a Code conflict, it should be up to the bankruptcy court to decide that, not the debtor. In this respect, Flugence further solidifies the debtor’s continuing duty to disclose.
The second interesting point is about the liability limitations the bankruptcy trustee may have against the personal injury defendants. In Flugence, the personal injury defendants argued that their exposure – the maximum amount of potential recovery against them – should be limited to the unsatisfied debt to Flugence’s creditors. Those defendants presented a compelling argument: they argued that “it would be inconsistent with the goals of bankruptcy to allow the trustee to pursue a claim where … it would disproportionately benefit the attorneys over the creditors.” In other words, any amount recovered beyond the debt to the creditors would go, in whole or in part, to the attorneys prosecuting the tort claim. The Fifth Circuit rejected this argument, concluding that limiting recovery to the amount of the debt would reduce the likelihood that an attorney would agree to take the tort case, and then the creditors would get nothing. The court held that the trustee is not limited in the amount she can recover against the debtor’s defendants.
If you remember a lot from Flugence, it’s that there can be a question about whether an asset acquired after confirmation of a Chapter 13 plan is property of the bankruptcy estate. If you remember just one thing, it’s that there’s a continuing duty to disclose assets even where there’s uncertainty about whose property those assets are.
A copy of the opinion is available here.